RBI to look at harmonising regulations for microfinance lenders

Against the backdrop of the Assam Assembly passing a law to regulate microfinance institutions in the state, the Reserve Bank of India (RBI) on Friday said it will look to "harmonise regulatory frameworks" for such microlenders.

Microfinance lenders have witnessed a dip in loan collections after the passage of the Assam Microfinance Institutions (Regulation of Moneylending) Bill, 2020, in the poll-bound northeastern state in December.

Concerns have been raised about the law, which seeks to "protect and relieve" economically vulnerable groups from usurious interest rates and coercive recovery means, impacting credit culture.

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"In view of the evolving role of the sector, and the need for a robust framework for enhanced delivery of last mile credit and strengthening consumer protection, the RBI will come out with a consultative document harmonising regulatory frameworks applicable to various regulated lenders in the microfinance space," RBI Governor Shaktikanta Das said.

Making the comments while announcing the bi-monthly policy review, Das also noted that the MFI sector plays an important role in the last mile delivery of credit to the needy segments.

It can be noted that regulation of the MFI sector has always been a controversial topic. In 2010, Andhra Pradesh had come out with some laws which impacted MFIs, resulting in an intervention by the RBI with initiatives, including creation of a separate category of lenders (NBFC-MFIs) and also caps on interest rates.

The MFIs have strong networks going deep into a geography which work on intimate understanding of the borrowers while extending the unsecured loans. The risk taken and the costs of extending the credit result in high interest rates.

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Das also announced an expert committee on primary Urban Cooperative Banks (UCBs), which will provide a medium term roadmap for strengthening the sector, leveraging on the legislative amendments.

"The recent amendments to the Banking Regulation Act, 1949 have brought near-parity in regulatory and supervisory powers between UCBs and commercial banks, including those related to governance, audit and resolution," Das said.

Constitution of the committee and its terms of reference will be announced shortly, he added.

In the aftermath of the Punjab Maharashtra Cooperative (PMC) Bank crisis, the government had amended the Banking Regulation Act, giving the RBI full control to regulate the UCBs.